(PART 1) Commercial Property & Casualty Insurance – The Basics


Property Insurance

There are three causes of loss forms: the Basic, Broad, and Special causes of loss. The Basic and Broad causes of loss forms are named perils forms; they provide coverage for loss from only the particular causes that are listed in the policy as covered. The Special causes of loss form is an all risks form; it provides coverage for loss from any cause except those that are specifically excluded.

The Special form is property insurance covering loss arising from any fortuitous cause except those that are specifically excluded. This is in contrast to named perils coverage, which applies only to loss arising out of causes that are listed as covered. Although many industry practitioners continue to use the term “all risks” to describe this approach to defining covered causes of loss in a property insurance policy, it is no longer used in insurance policies because of concern that the word “all” suggests coverage that is broader than it actually is. Because of this concern, many industry practitioners have begun to use the term “special perils” instead of “all risks.”  Either Basic or Broad forms is the property insurance term referring to policies that provide coverage only for loss caused by the perils specifically listed as covered (previously referred to and often described as “Named Perils”).  It contrasts with all risks coverage, which applies to loss from all causes not specifically listed as excluded.

A Basic causes of loss form provides coverage for the following named perils: fire, lightning, explosion, smoke, windstorm, hail, riot, civil commotion, aircraft, vehicles, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action.

A Broad causes of loss form provides named perils coverage for the perils insured against in the Basic causes of loss form (fire, lightning, explosion, smoke, windstorm, hail, riot, civil commotion, aircraft, vehicles, vandalism, sprinkler leakage, sinkhole collapse, volcanic action), plus the following additional perils: falling objects; weight of snow, ice, or sleet; water damage (in the form of leakage from appliances); and collapse from specified causes.  Please note Theft coverage is absent from Basic and Broad Forms.

A Special causes of loss form provides what is sometimes referred to as “all risks” coverage: coverage for loss from any cause except those that are specifically excluded. Choosing the Special form also shifts the burden of proof of a loss from the insured to the insurer.  In the Basic and Broad forms the insured must state what hazard caused the loss and to which the insurance applies.

Real Property

This includes land and most things attached to the land, such as buildings and vegetation. Growing crops, since they are physically attached to the soil, are generally considered real property. The definition of “land” includes not only the surface of the earth, but also everything above and beneath it. Thus, the ownership of a tract of land theoretically includes both the airspace above it and the soil from its surface to the center of the earth.  Property permanently attached to a building is also considered Real Property for insurance coverage purposes.  For insurance purposes, land is not covered, only buildings, personal property and business income.

Personal Property

This includes all tangible property that is not classified as real property.

Inland Marine Floaters

Inland marine insurance is designed to cover property while it is in transit from one place to another and/or property that is mobile by nature, purpose and design.  The most common Inland Marine coverages are:

  • Builders Risk Policies
  • Installation Floaters
  • Equipment Floaters
  • Transportation Floaters

These coverages can be covered by a separate insurance policy or as an endorsement extending the coverage in some property insurance forms.

         Ocean Marine (Cargo)

Ocean (or marine) cargo insurance was designed to cover loss or damage to goods carried via a ship over the sea.  Ocean cargo insurance policies have evolved over the years as cargo transportation has shifted from a single mode (ships) to multimodal.  Most ocean cargo policies sold today afford “warehouse-to-warehouse” insurance protection. Coverage begins when the goods leave the seller’s warehouse, continues while the property is in transit via water, air, and land, and ends when the cargo arrives at the buyer’s warehouse.  The responsibility of who purchases the insurance on the property is delineated by The Bill of Lading negotiated and provided by the shipper of the property or in conjunction with the shipper or freight forwarding agent.

Business Income

Insurance covering loss of income suffered by a business when damage to its premises by a covered cause of loss causes a slowdown or suspension of its operations. Coverage applies to loss suffered during the time required to repair or replace the damaged property. It may also be extended to apply to loss suffered after completion of repairs for a specified time frame.  Business income coverage is the only insurance coverage that will cover the lost profits of a business after a covered loss occurs.

Extra Expense

Extra expense coverage is designed to pay for costs in excess of normal operating expenses that are incurred by a business to continue operations without interruption after a direct property damage loss. It is not a substitute for business interruption coverage. Extra expense coverage provides no recovery for income lost as a result of an interruption.

Contingent Business Interruption

This insurance pays for the loss of income or increase in expenses resulting from damage from a covered cause of loss to the premises of another organization on which the insured depends, such as a key supplier or customer.

Tips regarding property insurance:

  1. Be aware of, read and understand the Mold Exclusion(s) in practically every property insurance policy. This is the issue of our time in insurance.
  2. Property insurance premiums are determined by a myriad of factors but the basic common denominator is the rate. Property insurance rates are usually quoted and can be measured by the “rate per $100” of insured property values.  This would include all total insured values which includes the value of buildings, personal property and business income limits.
  3. As with many things, property insurance is normally “cheaper by the dozen”. This is to say the rate per $100 will normally be less the higher the total insured values being insured is.  Example:  If you have an apartment complex with values of $2,000,000 and your competitor has an apartment complex with similar risk factors (age, type of construction, fire protection, loss history, etc.) and the total insured values of your competitor’s apartment complex is $20,000,000, your competitor will have a lower rate per $100 of the total values than you have.
  4. Building property values has nothing to do with what you paid for the property or the amount of the mortgage (if any) on the property, or the market appraisal price. The value to be insured totally depends on what it will cost to repair or replace the property at the time of the loss.  Correct valuation is critically important when a loss occurs.  The policy will not pay more than the insured value and if the property is insured for less than the replacement cost, you may very well, and probably will, be penalized by the coinsurance provision contained in most property insurance policies.
  5. The two primary valuation methods for establishing the value of insured property for purposes of determining the amount the insurer will pay in the event of loss is either Replacement Cost (usually defined in the policy as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation) or Actual Cash Value typically calculated in one of three ways: (1) the cost to repair or replace the damaged property, minus depreciation; (2) the damaged property’s “fair market value”; or (3) using the “broad evidence rule,” which calls for considering all relevant evidence of the value of the damaged property. The determination of the depreciated amount is almost always fodder for arguments between the claims adjuster and the policyholder.
  6. Coinsurance provisions in a property insurance policy will penalizes the insured’s loss recovery if the limit of insurance purchased by the insured is not equal to or greater than a specified percentage (commonly 80 percent) of the value of the insured property. The coinsurance provision specifies that the insured will recover no more than the following: the amount of the loss multiplied by the ratio of the amount of insurance purchased (the limit of insurance) to the amount of insurance required (the value of the property on the date of loss multiplied by the coinsurance percentage), less the deductible. The amount of the loss that is not payable to the insured as a result of failure to comply with the coinsurance provision is commonly referred to as a coinsurance penalty. In commercial property insurance policies, it is sometimes possible to avoid the possibility of a coinsurance penalty with an agreed value provision. The coinsurance penalty occurs when a partial loss occurs. The formula for the penalty is:  The property amount insured divided by the amount that should have been insured multiplied by the loss amount.  Example:  You buy a building for $75,000 but the actual cost to replace the building is $125,000.  You insure it for $75,000 (the amount you paid for it) with a policy that has the normal 80% coinsurance provision.  You incur a loss, say, due to wind blowing the roof off.  The cost to replace the roof is $30,000.  You do not get $30,000.  You get $22,500.  The amount you insured was $75,000.  The Coinsurance Provision requires you to insure the property for at least $100,000 (80% of $125,000).  You only insured to $75,000, which is 75% of what you should have insured the property for, so you take the loss amount of $30,000 and multiply by .60 (60%) of the loss = $22,500.  This is a rude awakening for many property insurance policyholders at the time of a loss but is clearly stated in the policy (yet, I have never seen a claimant that understood this provision after a loss!)

The insurance industry was practically built on insuring property.  Although no longer the largest piece of the property and casualty insurance industry premium pie (now at about 20% or $6-75 billion annually) it is the most widely purchased type coverage, for a number of reasons, (the requirement of lender’s on property the make loans on or hold has collateral, not being the least of these).  The mother of all modern property insurance policies in the use today is 1943 New York Standard Fire Insurance Policy.  Many underwriters and claims adjusters in the generation just before mine were required to memorize this 2,060 word document.  A review of the old policy wording versus many property insurance policies sold today will have many more similarities than differences